Dan Walters

CalPERS’ unfunded liabilities grow as its investment earnings lag

CalPERS investment officer explains impact of British exit from EU

Ted Eliopoulos, CalPERS chief investment officer, is featured on this CalPERS video explaining how the fund can exploit the Brexit impact on the stock market.
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Ted Eliopoulos, CalPERS chief investment officer, is featured on this CalPERS video explaining how the fund can exploit the Brexit impact on the stock market.

You can smear lipstick on a pig, but that doesn’t change its innate porcinity.

Officials of the California Public Employees Retirement System, the nation’s largest pension trust fund, tried Monday to cast its very anemic investment earnings – well under 1 percent – in a positive light.

“Positive performance in a year of turbulent financial markets is an accomplishment that we are proud of,” CalPERS’ chief investment officer, Ted Eliopoulos, said in a statement as the fund’s 0.61 percent investment performance for 2015-16 was released.

That’s not as outlandish as it sounds because CalPERS is not alone. Pension funds and other big-scale investors around the world are seeing very slight, or even negative, results in an era of political and economic volatility, particularly in Europe, and interest rates near zero.

Eliopoulos said a a 3.4 percent loss in stocks, which are 52 percent of the CalPERS portfolio, dragged down its overall performance.

But the fact that CalPERS is not alone is not comforting. It means there’s almost nothing Eliopoulos can do on his own to generate higher returns – and, in fact, he sees an extended period of low trust fund earnings.

Over the last two years of earning just a fraction of the assumed 7.5 percent “discount rate,” CalPERS has fallen behind its assumptions by $30-plus billion. Thus, the entire trust fund has shrunk in relative terms because “contributions” by state and local governments and their employees fall well short of pension payouts and the earnings needed to bridge the gap haven’t been there.

With the fund stuck at around $300 billion for two years, it’s about $100 billion short of fully funding its pension obligations, and falling shorter each day. And that shortfall is based on its 7.5 percent discount rate, even though the average return has been under that mark for decades.

CalPERS has ramped up mandatory employer contributions to more than $10 billion a year and will continue as long as investment earnings lag.

But how far can they go? The state, counties and most special districts don’t have huge pension costs relative to their budgets – just 2.9 percent of the state budget. But cities are hit hard because they devote much of their budgets to police and fire personnel who have the most expensive benefits.

Soaring pension costs have contributed to the bankruptcies of three cities, and under the revised schedule that went into effect July 1, contributions of 50 percent of payroll, or more, for police and fire personnel are not uncommon.

If one cannot fairly fault CalPERS for anemic earnings, its overseers can be fairly criticized for maintaining the 7.5 percent earnings assumption that their own advisers say is too high.

Lowering it to a more realistic level, say to the 5-6 percent range, would sharply increase the unfunded liability and thus ramp up political pressure for more tax dollars from employers, or perhaps for modifying pension promises. It would risk a backlash in the form of one of the many pension reforms that have surfaced in recent years.

But just as a pig with lipstick is still a pig, a pension fund in crisis is still in crisis, and ignoring that reality benefits no one, including pensioners.

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